Asked by Lizzie Stanz on Jun 04, 2024
Verified
Pottery House orders finished goods for the business quite frequently. The business generally orders 6,500 serving sets a year at $40 per set. Carrying costs are 20% of inventory and it costs $30 to place and receive an order. How many orders should Pottery House place per year and what should the size of each order be?
A) 255 sets; 25X per year
B) 221 sets; 29X per year
C) 93 sets; 70X per year
D) 156 sets; 42X per year
Carrying Costs
Expenses associated with holding inventory, including storage, insurance, and opportunity costs, impacting a company's financial performance.
Orders
Directions or commands given by authority, or customer requests for goods or services.
- Apply the concept of economic order quantity to manage inventory efficiently.
Verified Answer
LS
Laurencia StorrJun 04, 2024
Final Answer :
B
Explanation :
Using the economic order quantity (EOQ) formula:
EOQ = sqrt(2DS/H)
Where:
D = annual demand (6,500 serving sets)
S = cost to place and receive an order ($30)
H = carrying cost as a percentage of inventory (20%)
Hence, H = 0.20($40) = $8
EOQ = sqrt[(2 x 6,500 x $30) / $8] = 221 sets
To calculate the number of orders per year:
Number of orders = annual demand / EOQ
Number of orders = 6,500 / 221 = 29.4
Therefore, Pottery House should place 29 orders of 221 sets per year, which would minimize the total annual inventory cost.
EOQ = sqrt(2DS/H)
Where:
D = annual demand (6,500 serving sets)
S = cost to place and receive an order ($30)
H = carrying cost as a percentage of inventory (20%)
Hence, H = 0.20($40) = $8
EOQ = sqrt[(2 x 6,500 x $30) / $8] = 221 sets
To calculate the number of orders per year:
Number of orders = annual demand / EOQ
Number of orders = 6,500 / 221 = 29.4
Therefore, Pottery House should place 29 orders of 221 sets per year, which would minimize the total annual inventory cost.
Learning Objectives
- Apply the concept of economic order quantity to manage inventory efficiently.